TY - JOUR
AU - Lorenzoni,Guido
AU - Walentin,Karl
TI - Financial Frictions, Investment and Tobin's q
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13092
PY - 2007
Y2 - May 2007
DO - 10.3386/w13092
UR - http://www.nber.org/papers/w13092
L1 - http://www.nber.org/papers/w13092.pdf
N1 - Author contact info:
Guido Lorenzoni
Department of Economics
Northwestern University
2001 Sheridan Road
Evanston, IL 60208
Tel: 847/491-8243
Fax: 847/491-7001
E-Mail: guido.lorenzoni@northwestern.edu
Karl Walentin
Sveriges Riksbank
103 37 Stockholm
Sweden
Tel: +46-8-7870491
Fax: +46-8-210531
E-Mail: karl.walentin@riksbank.se
AB - We develop a model of investment with financial constraints and use it to investigate the relation between investment and Tobin's q. A firm is financed partly by insiders, who control its assets, and partly by outside investors. When their wealth is scarce, insiders earn a rate of return higher than the market rate of return, i.e., they receive a quasi-rent on invested capital. This rent is priced into the value of the firm, so Tobin's q is driven by two forces: changes in the value of invested capital, and changes in the value of the insiders' future rents per unit of capital. This weakens the correlation between q and investment, relative to the frictionless benchmark. We present a calibrated version of the model, which, due to this effect, generates realistic correlations between investment, q, and cash flow.
ER -